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Tax Reform: How Will It Affect You?

New Tax Brackets for Individuals and Corporations

The tax brackets have been changed to 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate is down from 39.6% and rates are generally lower at various income levels. The new rate structure is set to expire at the end of 2025.

For businesses, the corporate tax rate is now 21%, down from a top rate of 35% previously. Unlike the individual tax rate changes, this rate reduction was made permanent. The corporate AMT was eliminated.

Provisions that Affect Individuals’ Tax Returns

The standard deduction jumped to $12,000 for single individuals and $24,000 for married couples. At the same time, the law eliminated the existing $4,050 personal exemption for every taxpayer and their dependents. As a result, taxpayers who itemized in the past should take into account whether the the standard deduction is now higher than their total deductions. For larger families or single parents, the changes may have resulted in fewer chances to lower their taxable income. However, that problem could be offset by the law’s doubling of the maximum child tax credit to $2,000. The phase-out for the child tax credit is now higher, beginning after income levels of $400,000 for married filing joint and $200,000 for all other taxpayers, so it is accessible to more taxpayers than it was in the past.

For those who do itemize, there is no longer a limit on itemized deductions (this provision ends in 2025).

A $10,000 cap on the total deduction for state and local taxes and property taxes, something to be considered by taxpayers in high tax states and cities. Tax planning in this area may also be affected by whether the taxpayer is subject to the individual alternative minimum tax (AMT), which remains in effect under the new law.

Interest on new mortgages is deductible up to $750,000 in debt. The maximum amount of debt was previously $1 million. This does not affect mortgages in place before December 16, 2017, but should be considered in home financings going forward, since less of the interest will be deductible. It is also no longer possible to deduct home equity loan interest (up to $100,000 was previously deductible).

The income levels at which you’re subject to the AMT have been increased, which should mean it will affect fewer taxpayers. This change will end after 2025.

Starting in 2019, there will be no penalty for individuals who do not have health care insurance.

The estate tax exemption roughly doubled from $5 million to $10 million. Indexed for inflation in 2018, the exemption rose to $11.2 million for individuals and $22.4 million for married couples. Above that level, estates are taxed at a 40% rate. The exemption also applies to the gift and generation-skipping transfer taxes, so families have an opportunity to transfer a great deal of wealth in the years before the exemptions are set to return to much lower levels in 2025.

Expansion of Section 529 plans. Up to $10,000 annually of the funds in these tax-advantaged savings accounts can now be used for K through 12 private school tuition. These tax benefits were previously only available to those saving for college.

The alimony deduction is eliminated for divorces and separation agreements that go into effect after December 31, 2018.

Moving expenses, whether personal or reimbursed by an employer, can’t be deducted except by a member of the military. You also cannot deduct unreimbursed business expenses or casualty and theft losses that occur outside of a declared presidential disaster area.

New Rules for Businesses

A maximum 20% deduction for “qualified business income” of pass-through entities. This rule, which is subject to various limitations, is available to sole proprietors, partnerships, LLCs and other non-corporate businesses. It begins to phase-out at $157,500 for most service providers ($315,000 phase-out for married taxpayers).

An increase in the section 179 expensing to $1 million from $500,000, with a phase-out beginning at $2.5 million.

Limits on net operating loss deductions. The deduction for losses, which was unlimited, is now limited to 80% of taxable income. Carrybacks are essentially eliminated (except for in certain losses in the trade or business of farming). NOLs can be carried forward indefinitely.

This far-reaching legislation affects many individuals and businesses. Contact your CPA for more details and visit the AICPA’s Tax Reform Resource Center.